Most of the time, the amount of the commission at goal (or “quota”) is higher if the quota is higher – so if one sales person has a $1M quota and another has a $1.5M quota, then one has a target commission that is 150% that of the other. Whereas in a “bonus” world, the target incentive is fixed for the role (e.g., $40k per year) and is paid for hitting quota, which may vary from one person to the next.

Some people hear the word “bonus” and mistakenly conclude that the payout outcome will be binary (all or nothing). While that’s possible, it’s rarely advisable. A typical sales compensation bonus plan will include payout rates to pay additional compensation for every increment of additional performance. The most straightforward approach here is to pay 1% of the target payout for every 1% of the quota achieved. So if the target payout is $40,000 and the quota is $1,000,000 then for every $10,000 in sales (1% of $1M), $400 is paid (1% of $40,000). It is also usually advisable to pay at a higher rate once the quota is achieved. So in our example, the payout for every additional 1% of quota over 100% (every $10,000 over $1M) might be 2% of the target incentive ($800).

Of course there are myriad nuances and variations, including the possibility of “personal commission rates” which communicate a “bonus” as if it were a “commission,” etc.

In deciding whether your compensation plan should be quota-based or commission-based, the key question is one of your business’ philosophical starting place about variable pay for sales people.

1. Do you start with a fixed amount you know you can afford to pay to get your offering sold (e.g., 5% of revenue), and design the plan to manage to that value?
2. Do you start with the idea that the sales job has a market value, and that those who meet the goals assigned based on the sales organization and roles you have put together should earn that market value?

If your starting place is #1, a commission is likely a better fit for your business. If your starting place is #2, a bonus type incentive could be a better approach. Commissions are more typical and appropriate in earlier stage businesses, new business roles, product launches, and certain industries; and bonuses are more typical and appropriate in more mature businesses, complex selling organizations, and account management roles.

Of course, both the cost of the sales compensation compared to the sales team’s productivity and the compensation delivered to the sales people as it relates to their job prospects outside the company must both work in order to have a successful business model.

New business sales jobs focus primarily on acquiring new accounts.  The incentive plan rewards for new revenue or profit margin brought to the company.  In contrast, account managers often are assigned a book of business that includes several new business sellers’ territories. Their focus is on retaining and growing established accounts (so new business sellers can continue to bring in new customers).

The territory manager we will discuss is a hybrid of the two with the expectation to not only acquire new customers but also retain these customers (and grow revenue or profit margin). The compensation plan that results is often is a hybrid of the hunter and farmer plans’ key components that may let the territory manager decide whether hunting or farming will maximize the incentive pay regardless of sales management’s preference for a more balanced approach.

An alternative approach that has been more successful in achieving sales management’s objective is to measure performance and pay incentive pay based on net new business revenue or profit margin.  This approach communicates to territory managers that any lost business must be offset by new customer acquisition or selling additional products or services to current customers.

The key is that the net new business goal is set based on historical territory performance plus the desired growth.  The goal will not usually be as great as for a direct seller since the lost business goal for account managers is an offset to the growth.  In addition, there is often real work involved in servicing and maintaining the established book at historical levels before any growth is achieved. However, the net new business goal should always be a positive number – new business exceed anticipated losses to keep the territory manager focused on growing the business by at least the overall percent the company is expecting revenue or profit margin to grow.

When goal setting is a challenge for this job and results may be volatile, and effective compensation arrangement may be a mix of bonus and commission.  For example a prorated bonus is paid for performance above threshold to excellence (e.g., 80% to 120%) then a commission is paid for above excellence performance (over 120% in this example).  This approach retains the needed linkage between pay and performance while ensuring that the additional incentive dollars are self-funded.

The problem occurs when stellar performance this year results in a very high quota next year (calculated as a percent increase over this year’s results), and so a significant risk that the new higher quota will not be attained next year. Sales person frustration will be compounded if, in addition, there is a relatively high threshold below which no payout is earned (e.g., 85% or 90% of quota), and total compensation at target does not increase with added quota. If all of this aligns, then the sales person who wants to maximize total earnings over the long run may do best to adopt a pattern of dramatic over-performance in one year followed by dramatic under-performance the next year. Most sales people in this situation, even if they realize that the high-low-high-low pattern is their best strategy do not intentionally execute it. But they are painfully aware that top performance will not go unpunished.

To avoid this situation, consider these suggestions for quota-based plans:

1. Set quotas based on territory potential, not just prior year actual sales.
2. Avoid setting low quotas for weak performers and high quotas for strong performers, unless you…
3. …Offer higher total compensation at target to those with the highest quotas, perhaps adjusting both the base and the variable pay at target for them.
4. Set any threshold at the level of quota attainment below which performance is truly unacceptable. And you know what’s unacceptable because you actually terminate or reassign people who perform at this level, and it’s probably not more than 5% of your sales people. (If you have more than 10% or 15% of your sales people below threshold, earning no variable pay, and you’re not putting them on a performance plan or moving them out of the role, then your thresholds are too high.)
5. Offer meaningful acceleration for over-achievement so that the added risk of next year’s higher quota (if that’s what will happen) is offset by the added compensation for this year’s over-achievement.

If you have other suggestions, please add them below in the comment box.

• Are those account movements good for business? Does the lack of a stable long-term relationship hurt customer loyalty?
• Why are the accounts moving?
  • In a quota-based incentive plan, is this perhaps a case of “hot potato” in which both quota and sales credit move with the account, and it helps a rep to “dump” accounts that are likely to generate under-quota sales?
  • In a commission plan, are sales managers moving accounts in an effort to directly manage pay by giving more accounts, and therefore more sales credit, and therefore more income to the reps they think need it?
• What else? Please feel free to add more in the comment section below.

So it might be good to start with the goal of reducing the account movement. However, if this appears to be inevitable you definitely want to anticipate it in your design. Here are a few ideas:

1. Independent months or quarters. Instead of measuring results for a whole year, issue goals and measure results for each quarter (or month) separately so that an account move will not result in continued adjustments for the rest of the year.
2. If the reason for the account movement is to balance territories, and keep opportunity even across the team, then a commission type plan may be a good idea. In this case, only allow movements at the end of a month, and calculate the commission based on credit for all accounts assigned during that month. Add the months of credit together and you have year-to-date credit for calculation purposes.
3. If the reason for the account movement is “hot potato” (see 2nd bullet above), then you need another mechanism to total pay level problems. If this is the only way managers can retain good reps, then the plan is not delivering market-competitive pay. You may need to review base pay levels, consider adding comp at target for higher quota territories, etc.

I invite others to join in with whatever good ideas you have found to help out with this in the comment section below.